Option Investor
Newsletter

Daily Newsletter, Thursday, 5/3/2012

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Data Mixed, Payroll Report Looms

by Thomas Hughes

Click here to email Thomas Hughes
Today's economic data continued to be mixed. Without a clear sign of economic direction the markets pulled back awaiting the non-farms payroll report tomorrow.



Economic data released early in the morning was mixed. The data, retail comparitive store sales did not affect the over all market but later reported weakness in manufacturing did. The major indexes were indicated to open a few points above yesterday's close, did and then held the level for the first half hour of trading until the ISM report came out.

Today was also a heavy earnings reporting day with over 300 companies reporting. Some big earnings misses sent some high profile stocks plummeting during the day's trading. At ten, ISM Manufacturing data tipped the scales and sent the markets into negative territory.

Initial jobless claims dropped for the first time in over a month as the previous weeks number was revised up. Initial claims for the week ending 4/28 is 365,000, down 27,000 from the previous weeks revised 392,000. This weeks claims number is far less than the 378,000 that economists had been expecting. Initial claims are now near the four year lows set in February. The analysts had predicted a spike in jobless claims associated with the Easter holidays that should be over now. The drop in claims helps counter concerns of further softening of the jobs markets sparked by the ADP report earlier in the week. The low ADP number suggests that hiring has fallen off. Tommorow's release of April non-farm job creation data will be an important data point. The estimate is for around 163,000 jobs, slower than the previous months but still a good number. The four week moving average of initial claims ticked up marginally.


The number of people seeking second of week of unemployment fell 53,000 to an adjusted 3.28 million. Continuing claims have been trending down all year and are near the lows set just last month.


Total claims, which lags initial claims by two weeks, also continued to decline. About 6.6 million Americans filed for some form of unemployment in the week ending 4.14. Total claims have been receding all year and are at the low for 2012.


Challenger, Gray and Christmas Inc released data on planned job cuts in the US market today. Firings are up 11% over last year at the same time but the pace is slackening. The report went on to say that there should not be any new spike in job cuts but also that job creation was not outpacing job losses. The reading for April was 11% higher than April last year but the seasonally adjusted pace of firings is less than the pace for all of 2011. The spike in job cuts in April could be related to the Easter holiday.

American productivity fell by a half percent in April. The loss of productivity led to an increase in labor costs. Rising labor costs are one thing hurting manufacturing. The ISM manufacturing survey came in at a weaker than expected 53.5, down from the previous 56. Economists had been expecting some slowing but not as much,the consensus estimate was for a reading of 55.5. This is the weakest reading of the year.

The European Central Bank left its key interest rate unchanged today. The rate is 1%. Bank President Mario Draghi stated that the current long-term-refinancing-operations, concluded earlier this year, needed “time to work”. He called for banks to strengthen their “resilience” and to retain earnings. He went on to say that the economic risks were to the downside and highlighted by recent data. Critics are arguing the stimulus may not be enough as Euro zone unemployment rises to multi-year highs.

Spain managed to sell its debt to a welcoming market but faces higher interests rates. European markets ended the day mixed. The FTSE finished up 0.15%, The CAC ended the day down by -0.09% and the DAX closed down by -0.24%.

Asian shares also ended the day mixed as data from of China supports the continued weakness of the country. House prices in the country fell for an 8th month and the services PMI fell for. China is still bracing for a soft landing but there is no sign of the economy bottoming yet. The Hang Seng Index fell by -0.28%, the Nikkei gained +0.31% and the Shang Hei index gaines +0.07%.

Oil and gasoline plunged over 2% today as concerns of global demand and OPEC's statements of supply weighed on trading. Traders are fearing that the global demand will not meet current expectations and the economic data is mounting to support the fear. Added to that OPEC came out and stated that “there is ample supply” of crude on the market. According to them the elevated prices are due to speculation.

Natural gas inventories continue to rise. In the past week injections have outpaced withdrawals by 28 billion cubic feet. This was less than the forecast 30-34 bcf and sent prices up. Natural gas climbed 10 cents to gain over 4% in today's trading.

The rates on thirty year bonds held steady today and traded in a tight range.

Thirty year bond rates, daily

Retail sales slowed in April. The decline is blamed on the early start to spring. There was expansion across the retail industry but gains failed to meet expectations. There is some concern that middle class consumers are starting to struggle. One notable retailer who is struggling to improve business is Gap Stores. The clothing retailer, who has been hurting, lost even more market share in the month. Same store sales declined 2%, a larger margin of loss than March's 0.9%. The stock opened lower on weak volume, traded higher throughout the day but still finished down by 1.6%.

Gap Stores, daily

TJ Maxx reported strong April sales growth, strong enough to raise first quarter and full year eps guidance. April sales are were up 7% over the same period last year. Sales for the quarter ended 4/28/2012 are up over 11% from last year. Comp store sales came in at 8% on strength in America, Canada and surprisingly, Europe. The release stated that sales growth is being driven by repeat business as shoppers take advantage of savings and value offered by the chain. Full year guidance was raised to a range of $2.26-$2.36 per share, above the previous range and well above last years earnings. The stock has already made an impressive run up this year and could reach new highs. The stock traded down today and but did make a new intra-day high. Long term the stock looks good and momentum is strong.

TJ Maxx, daily

Limited Brands also increased same store sales more than expected. The company reported comp store growth for the month up by 6% over last year and 7% for the quarter. The company went on to restate first quarter earnings guidance to the top of it's range at $0.38-$0.40 per share. Limited's stock has been trending up this year, but it has been a little choppy. The stock continued a bounce from the short term moving average after the announcement and made a new all time high. The technicals indicators are weak but suggest there is some room to move up.

Limited, daily

Costco, Target and Macy's all missed their expected sales increases. Costco increased US sales by 4% and foreign sales by 3% in the month. For the quarter US and international comp store sales increased by 8%. The company stated that higher fuel prices and adverse foreign exchange impacted results for the month and the quarter. When fuel and exchange rates are factored in international sales looks better but total company sales is worse. Costco's next quarterly earnings statement is scheduled for May 24th. Shares of Costco stock dropped sharply on the news on moderately heavier trading volume. MACD is divergent from the recent decline in the stock which is currently trading near the middle of its 12 month range.

Costco, daily

Target missed its mark as well. The company reported what should have been strong results but the gains did not meet up with what analysts had been expecting. The company increased sales for the quarter by 5.3% but expectations were for more than 6%. The 5.3% is the highest quarterly gain for Target in about 6 years. In the report management was pleased with the results but offered no insight into earnings or the future. The stock dropped sharply, moving below the 30 and 50 day moving averages. The move came on high volume but support held at $56.

Target, daily

Macy's comp store gains also were not up to expectation. The stock dropped in early trading but found support during the day. Total store sales for the month of April were only up 0.4% from last year, trailing the sector. On a comparable basis the company only did a slightly better 1.2%. Given the shift in Easter holiday and spring sales seasons the company was within it's range for the March-April period. For the quarter Macy's was able to increase sales by 4.4% over last year. Macy's is expected to release earnings next Wednesday.

Macy's, daily

In earnings news GM made the biggest headline. The automaker beat the street on revenue but missed on earnings. Losses in Europe are mounting and the company is struggling to stay on track with its goals of profitability in Europe as the region suffers its financial crisis. GM is still the worlds largest automaker but has lost market share to competitors like Ford and Toyota. North American sales led the company but were offset by losses in Europe. North American sales topped $1.7 billion and the company was able to widen the profit margin in the region. The stock dropped on the news but momentum indicators are divergent. GM has support between $20 and $22.

GM, daily

Green Mountain Coffee Roasters was one of today's most active stocks. After reporting earnings and revenues well below expectations the stock lost 40% of it's value. The price of coffee is down in the first quarter but it did not help the makers of the Kuerig K-cup coffee systems. The company's earnings for the quarter were up 37% from the previous year but the gain lags the previous years increase. The company is losing patent rights to the K-cup this fall and faces competition from Starbucks and other companies who are now licensing with Green Mountain for k-cup branding.

Green Mountain Coffee Roasters

Coffee house operator and merchandiser Caribou Coffee also missed big. The company reported after the bell but the stock had already tumbled around 13%.

Caribou Coffee

Avon was shaking things up this morning with a share holder meeting that re-elected previous board member Andrea Jung. The company has been struggling with performance, bribery charges and an unsolicited bid from up and coming rival brand Coty. Avon has been trading down all week since releasing its earnings Tuesday.

Avon, daily

Whole Foods Market made its investors happy. The companies ongoing growth strategy is paying off, helping the food distributor to increase quarterly earnings by 14%. The news sent the stock up over 6.5% heavy volume. The stock has been trending up since 2009 and is now at an a new all-time high. In the report Whole Foods noted that Easter had shifted into the quarter this year and positively impacted earnings. On a same store basis earnings improved by 9% in the second quarter of fiscal 2012. One highlight of the report was an improvement to gross margins of 70 basis points to 36.3%.

Whole Foods Market, daily

Shares of Kraft traded down but steady today in anticipation of its release, scheduled for 4pm. The food giant posted net revenue growth of 4% and expects to see 5% growth for all of 2012. The results were less than hoped for and the stock traded down in after hours action.

Kraft, daily

Food maker Sara Lee reported a 3% gain in adjusted net sales for the third quarter of 2012. The company also restated earnings per share guidance to fall in the middle of the previously stated range of $0.89-$0.95 per share. The company is spinning off its coffee and tea segment and should close that deal by June 30th. Shares of the stock traded down today but found support at the 30 day moving average.

Sara Lee, daily

Value Click dropped over 20% today after it announced earnings news that beat analysts estimates. The company's outlook for the second quarter fell shy of expectations and sent the shares tumbling.

Value Click, daily

There were two IPO's today. The Carlyle Group and Pacific Trust Oil Group. The Carlyle Group opened at the low end of their range pricing at $22. The price was thought to be much higher because only 10% of the company was floated. The stock traded flat throughout the day.

Carlyle Group, one day

Pacific Trust also traded flat throughout the day.

Pacific Trust Oil Group

The concern of economic slowing weighed on the Dow today. Traders are waiting for tomorrows jobs report to get a better insight into how the labor market, and economy, is unfolding. The economy is still expanding, but how much the expansion is slowing is still unknown. The Dow is still trending up, but cautiously, as data unfolds. I don't think tomorrow is a turning point but it is a day with two key points of data, the non-farm payrolls number and the unemployment rate.

Dow, daily

The S&P 500 came down to the short term moving average today where it stopped. Traders are looking to the jobs report for more direction to economic outlooks. The data has been mixed, making it hard to get a clear look at future expectations.

S&P 500

The VIX is below twenty and near one year lows.

The Volatility Index, VIX, daily

The Nasdaq fell below its short term moving average today. The index remains bullish in the long term but momentum is in decline.


Data and economic news continue to drive the markets. Tomorrows jobs report will be closely watched. The ADP report gave us a benchmark but it can be wildly off. A surprise either way could send the market moving in the short term.

Thomas Hughes


New Option Plays

Oil & Gas Drilling

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Helmerich & Payne Inc. - HP - close: 49.28 change: -1.53

Stop Loss: 52.30
Target(s): 45.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HP is an oil and gas drilling company. HP is sinking under a bearish trend of lower highs and lower lows. Today the stock just broke round-number support at the $50.00 mark.

I am suggesting bearish positions at the open tomorrow. We'll start with a stop loss just above the simple 20-dma. Our target is $45.25.

- Suggested Positions -

Buy the May $50 PUT (HP1219Q50) current ask $1.95

- or -

Buy the Jun $45 PUT (HP1216R45) current ask $1.05

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/27/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on May 03, 2012



In Play Updates and Reviews

ROST Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Ross Stores hit our bullish exit target today. Meanwhile our COL put trade was triggered.

Current Portfolio:


CALL Play Updates

Alliance Data Sys. - ADS - close: 128.30 change: -1.37

Stop Loss: 126.75
Target(s): 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
05/03 update: No surprises here. The market's decline pulled ADS toward the bottom of its $128-130 trading range. We are waiting for a move higher. Currently we have a trigger to buy calls at $130.75. A breakout could spark some short covering. The most recent data listed short interest at 18% of the small 48.7 million share float.

Trigger @ $130.75

- Suggested Positions -

buy the May $130 call (ADS1219E130)

- or -

buy the Jun $135 call (ADS1216F135)

Entry on April xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 700 thousand
Listed on April 28, 2012


Capital One Financial - COF - close: 55.56 change: -0.52

Stop Loss: 54.25
Target(s): 59.00
Current Option Gain/Loss: May55c: + 0.0% & Jun57.5c: + 7.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/03 update: COF followed the market lower. Unfortunately today's -0.9% decline underperformed the rest of the financial sector. Technically today is a bearish engulfing candlestick (reversal) pattern. You could argue that COF has formed a short-term bearish head-and-shoulders pattern over the last four days that would suggest a downside target of $53.00 if it breaks under the $55.00 level. I am raising our stop loss up to $54.25.

- Suggested Positions -

Long May $55 call (COF1219E55) Entry $1.40

- or -

Long Jun $57.50 call (COF1216F57.5) Entry $1.07

05/03/12 new stop loss @ 54.25
04/26/12 triggered at $55.25

Entry on April 26 at $55.25
Earnings Date 07/11/12 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on April 25, 2012


3M Co. - MMM - close: 89.39 change: -0.13

Stop Loss: 88.45
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/03 update: There is nothing new to report here. MMM is still consolidating sideways under resistance near $90.00. I am suggesting a trigger to buy calls at $90.25 with a stop at $88.45. Our multi-week target is $94.50.

Trigger @ 90.25

- Suggested Positions -

buy the May $90 call (MMM1219E90)

- or -

buy the Jun $90 call (MMM1216F90)

Entry on April xx at $ xx.xx
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on April 26, 2012


NetEase, Inc. - NTES - close: 59.91 change: -0.25

Stop Loss: 57.95
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the mid May earnings report
New Positions: Yes, see below

Comments:
05/03 update: It was another quiet day for NTES. The stock's sideways consolidation narrowed significantly today as it hovered near $60.00. I am suggesting we use a trigger to buy calls on a rise at $60.75. We'll use a stop loss at $57.95 to start. Our exit target is $64.75. We do not want to hold over the mid May earnings report. FYI: The Point & Figure chart for NTES is bullish with a $68 target.

Trigger @ $60.75

- Suggested Positions -

buy the May $60 call (NTES1219E60)

- or -

buy the May $65 call (NTES1219E65)

Entry on April xx at $ xx.xx
Earnings Date 05/16/12 (unconfirmed)
Average Daily Volume = 588 thousand
Listed on April 28, 2012


PriceSmart Inc. - PSMT - close: 83.35 change: -0.03

Stop Loss: 78.85
Target(s): 85.75
Current Option Gain/Loss: + 9.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/03 update: PSMT actually held up pretty well. Shares only gave up three cents and bounced between the $82-84 levels. A breakout past $84.00 would be bullish. I am raising our exit target to $85.75. More aggressive trades may want to aim higher. We are raising the stop loss to $78.85.

Earlier Comments:
The daily chart has an inverse head-and-shoulders pattern that is forecasting an $88 target. Our exit target is $84.75. More conservative traders may want to consider a tighter stop loss. FYI: The Point & Figure chart for PSMT is bullish with a $95 target.

- Suggested Positions -

Long May $80 call (PSMT1219E80) Entry $3.30

05/03/12 new stop loss @ 78.85, adjust exit to $85.75
04/28/12 new stop loss @ 77.65
04/24/12 PSMT is underperforming with a -4.3% reversal lower.
04/23/12 triggered at $80.75

Entry on April 23 at $80.75
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 313 thousand
Listed on April 21, 2012


Praxair Inc. - PX - close: 116.18 change: -0.26

Stop Loss: 113.90
Target(s): 124.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/03 update: Shares of PX also held up reasonably well. The stock remains inside its short-term trading range of $115.25-117.00.

I am suggesting a trigger to buy calls at $117.25. We'll start this trade with a stop loss at $113.90 although more conservative traders may want to use a stop closer to $115.00 instead. The $120 level is potential round-number resistance but we are aiming for $124.50. FYI: The Point & Figure chart is bullish with a $145 target.

Trigger @ $117.25

- Suggested Positions -

buy the May $115 call (PX1219E115)

- or -

buy the Jun $120 call (PX1216F120)

Entry on May xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 01, 2012


United Natural Foods - UNFI - close: 49.86 change: +0.99

Stop Loss: 48.25
Target(s): 54.50
Current Option Gain/Loss: +15.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/03 update: I was expecting a bigger move in UNFI today but the rally may have been muted by the market's widespread decline. Shares still outperformed the major indices with a +0.88% gain.

FYI: The Point & Figure chart for UNFI is bullish with a long-term $82 target.

- Suggested Positions -

Long May $50 call (UNFI1219E50) Entry $0.95

Entry on May 03 at $49.90
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on May 02, 2012


PUT Play Updates

Rockwell Collins - COL - close: 54.59 change: -0.46

Stop Loss: 56.15
Target(s): 51.50
Current Option Gain/Loss: May $55p: -12.0% & Jun$55p: - 2.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/03 update: Our bearish trade on COL is finally open. The stock broke down under support near $55.00 and its simple 200-dma. The stock hit our trigger to buy puts at $54.75. I would still consider new positions now.

- Suggested Positions -

Long May $55 PUT (COL1219Q55) Entry $1.25

- or -

Long Jun $55 PUT (COL1216R55) Entry $1.85

05/03/12 triggered at $54.75

Entry on May 03 at $54.75
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on April 25, 2012


Jos. A Bank Clothiers - JOSB - close: 47.95 change: -0.78

Stop Loss: 50.25
Target(s): 45.25
Current Option Gain/Loss: May50p: -23.3% or May$45p: -61.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/03 update: JOSB gave us a little bit of a scare this morning with a pop higher towards resistance near $49.00 but the rally lost steam and shares gave up -1.6% by the close. Technically today is an "inside day" so I would wait for a new drop under $47.50 before considering new bearish positions.

Earlier Comments:
We want to limit our position size because JOSB has an elevated amount of short interest. The most recent data listed short interest at 18.7% of the very small 27.5 million share float and this raises the risk for a short squeeze. Our short-term target is $45.25. More aggressive traders may want to aim for the $42-41 area instead.

(small positions)

Long May $50 PUT (JOSB1219Q50) Entry $3.00

- or -

Long May $45 PUT (JOSB1219Q45) Entry $0.65

Entry on April 23 at $47.50
Earnings Date 05/30/12 (unconfirmed)
Average Daily Volume = 596 thousand
Listed on April 21, 2012


Joy Global, Inc. - JOY - close: 68.59 change: -2.01

Stop Loss: 72.25
Target(s): 65.25
Current Option Gain/Loss: + 14.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/03 update: Shares of JOY underperformed the market with a -2.8% decline. The stock has also closed below key support at the $70.00 level. Readers can use this move as a new entry point. We have a target at $65.25 but more aggressive traders may want to aim lower.

Earlier Comments:
The plan was to limit our risk by keeping our position size small. I have to warn you that JOY can be a volatile stock. Adding to the volatility has been the occasional rumor that JOY might be a takeover target.

(small positions)- Suggested Positions -

Long May $70 PUT (JOY1219Q70) Entry $2.50

05/02/12 triggered at $69.75

Entry on May 02 at $69.75
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 25, 2012


Siemens AG - SI - close: 90.46 change: -0.81

Stop Loss: 91.55
Target(s): 86.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
05/03 update: SI inched lower today and shares are getting closer and closer to a breakdown under support near $90.00.

I am suggesting a trigger to buy puts at $89.75. Our target is $86.00. SI has support in the $85.50-85.00 zone from 2011. I am suggesting we keep our position size small. SI tends to gap open each day as it adjusts to trading back home in Europe. We'll use a stop loss at $91.55. FYI: The Point & Figure chart for SI is bearish with a $74 target.

Trigger @ 89.75 (small positions)

- Suggested Positions -

buy the May $90 PUT (SI1219Q90)

Entry on May xx at $ xx.xx
Earnings Date 04/25/12
Average Daily Volume = 839 thousand
Listed on May 02, 2012


Ulta Salon - ULTA - close: 90.85 change: -0.48

Stop Loss: 92.15
Target(s): 82.50
Current Option Gain/Loss: -62.9%
Time Frame: up to May option expiration
New Positions: see below

Comments:
05/03 update: Wow! It doesn't get any closer than that. Yesterday we raised our stop loss to $92.15 to give ULTA a little more room to maneuver. Shares spiked to $92.14 this morning before eventually settling lower. The stock seems to be consolidating in a bear-flag pattern but I would wait for a new drop under $90.00 before considering new bearish positions.

- Suggested Positions -

Long May $85 PUT (ULTA1219Q85) Entry $1.35

05/02/12 Readers may want to exit early right now. ULTA is not cooperating. I am adjusting our stop loss to $92.15.

Entry on May 01 at $87.95
Earnings Date 06/07/12 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on April 30, 2012


CLOSED BULLISH PLAYS

Ross Stores Inc. - ROST - close: 63.71 change: -0.14

Stop Loss: 59.45
Target(s): 64.50
Current Option Gain/Loss: +131.8%
Time Frame: exit prior to the mid May earnings report
New Positions: , see below

Comments:
05/03 update: Target achieved.

Shares of ROST ended the session down 14 cents but not before surging to $64.79 intraday. Our exit target was hit at $64.50.

(small positions) - Suggested Positions -

May $62.50 call (ROST1219E62.5) Entry $1.10 exit $2.55 (+131.8%)

05/03/12 target hit at $64.50
05/02/12 readers might want to exit tomorrow at the close to lock in gains early. Our exit target remains $64.50. current option bid is $2.40 (+118.1%)

chart:

Entry on May 01 at $61.58
Earnings Date 05/17/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on April 30, 2012